While investors are shunning real estate as an asset class, they are lapping it up in the stock market. Realty is the best performing sectoral index on the BSE this year with an over 90 per cent return, closely followed by the consumer durables index. This comes at a time when residential launches in the top eight cities of the country have declined to a seven-year low.
According to global real estate broker Knight Frank, residential launches in the top eight cities declined by 41 per cent in the first half of this year. Also, sales declined by 11 per cent during this period. But this has not stopped global brokerage CLSA from being bullish about real estate stocks.
“Affordable housing in India remains one of the most straightforward bull stories in Asian equities,” said the brokerage’s chief equity strategist Christopher Wood in his “Greed and Fear” note to clients last week. Wood has identified three areas where the government hopes to generate employment in the next 18 months. Of this the most important is the ramp-up of the policy that strives for housing for all by 2022. Road construction and textiles are the other two sectors where the government expects to create jobs on a large scale.
“The pick-up on the ground in affordable housing may not become visible until late 2018. But the ramp-up is definitely coming, which is also why investors should look at buying any pullback in stocks geared to affordable housing,” Wood said while highlighting that it would take 12-18 months for property developers to draw up plans and commence construction in the affordable housing segment.
Investors have been anticipating this. The Puravankara stock has gained 236 per cent this year. Though the stock is not included in the BSE realty index, it has gained the most this year among the significant players. Puravankara has the widest presence in over 10 cities and it plans to launch 15 million square feet of real estate in partnership with other companies over the next six quarters. Two-thirds of this, or 10 million square feet, will be in the affordable housing segment.
Among the index stocks, Indiabulls Real Estate is the biggest gainer with a 195 per cent rise this year. It is followed by Godrej Properties and Sobha with respective gains of 141 per cent and 140 per cent. Bengaluru-based Sobha created a new segment, Sobha Dream Series, a couple of years ago to enter the affordable housing segment. The strong balance sheets and brands of Sobha and Godrej Properties are helping them expand sales even in a sluggish market.
The Real Estate (Regulation and Development) Act (RERA) has fundamentally changed the nature of development by pushing internal rates of returns of projects lower and forcing developers to delay projects.
“Around a dozen players, which manage capital sensibly, can execute projects at speed and have the know-how to manage the ecosystem,” said Ritika Mankar Mukherjee, analyst with Ambit Capital, in a report this month.
Riding on the realty boom, HDFC Mutual Fund has launched its Housing Opportunities Fund that focuses on the housing theme and the multiple opportunities it offers in various sectors, including paints, cement and electrical appliances. Its biggest bet will be on affordable housing.
“There will be more such funds coming after the success of HDFC Housing Opportunities Fund,” said Tushar Bopche, vice-president, products, at IIFL.